China Plans to Launch Financial Stability Guarantee Fund

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The Chinese central government has announced that it plans to establish a financial stability fund as part of efforts to stymie systemic risk.

The 2022 Government Work Report (2022年政府工作报告) delivered by Premier Li Keqiang on 5 March calls for the establishment of a financial stability guarantee fund (金融稳定保障基金), as part of a raft of measures to shore up the health of the finance system.

“[We will] strengthen early risk warnings and prevention and control mechanisms, and establish a financial stability guarantee fund,” said the Report.

“[We will] employ market-based, rule-of-law based methods to dispose of risk and hidden hazards, and firmly guard the bottom-line against the onset of systemic risk.”

In October 2021 Sun Tianqi (孙天琦), head of the Chinese central bank’s financial stability department, wrote an essay for the China Financial 40 Forum pointing out that some developed economies had established financial stability funds, to provide assistance in the disposal of financial risk when required.

“These funds are normally managed by public authorities, and employ public funds or sector resources to provide assistance to designated financial institutions – usually systemically important financial institutions, or are used to respond to major financial risk events.

“Such mechanisms further diversify risk disposal fund resources, as well as employ systemic methods to promptly respond to financial risk, reducing the dependence upon the central bank as a lender of last resort, and preventing moral hazard.”

Ming Ming (明明), an analyst from CITIC Securities, said state-owned media that the 2022 government work report is the first to make reference to the establishment of a financial stability fund, and that if created it will serve to effectively prevent and dispose of systemic financial risk.

“In the past, financial stability guarantee funds have been effectively employed in Europe, and when it comes to specific models of operation reference can made to the experiences of European financial stability funds,” said Ming Ming.